2016 (8) TMI 502 - HC - Service Tax

Constitutional validity of levy of service tax - Section 65 (105) (zzzzv) of the Finance Act 1994 (FA) whereby the provision to any person by a restaurant, by having the facility of air-conditioning in any part of its establishment serving food or beverage, including alcoholic beverages or both, in its premises has been made amenable to service tax. - constitutional validity of Section 65 (105) (zzzzw) of the FA whereby the provision by a hotel, inn, guest house, club or camp-site by whatever name called to any provision, accommodation for a continuous period of less than three months has been made amenable to service tax. Held that - For good measure the Supreme Court held The concept of catering admittedly includes the concept of rendering service. The fact that tax on the sale of the goods involved in the said service can be levied does not mean that a service tax cannot be levied on the service aspect of catering. What the decision therefore does is to highlight the possibility of splitting up of the composite transaction into the provision of service element and the supply of food. The Respondents are justified in contending that as far as the interpretation of Article 366 (29A) (f) of the Constitution is concerned, the decision in Tamil Nadu Kalyana Mandapam Association v. Union of India (supra) fully supports their stand. The Parliament has further made the legal position explicit by inserting Section 66 E (i) of the FA read as it were with Section 65 (22) and 65 (44) of the FA. It states that the service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity is a declared service. The legislative carving out of the service portion of the composite contract of supply of food and drinks has sound constitutional basis as explained in the aforementioned decisions of the Supreme Court. Even if this is viewed as Parliament deploying a legal fiction, it is legally permissible. Thus it is not possible to accept the contention of the Petitioners that Parliament lacks the legislative competence to enact Section 65 (105) (zzzzv) of the FA with a view to bringing the service component of the composite contract of supply of food and drinks by an air-conditioned restaurant within the service tax net. - Decided against the assessee and in favour of revenue. Short-term accommodation in hotel - Held that - Provision of short-term accommodation in hotels etc. envisaged in Section 65 (105) (zzzzw) of the FA read with Section 65 (44) of the FA is a taxable event that is entirely covered by the term luxuries in Entry 62 of List II of the Seventh Schedule to the Constitution and therefore outside the legislative competence of Parliament. The exemption from service tax on the provision of accommodation for a room having a declared tariff of less than ₹ 1,000 per day or equivalent is by Notification No. 12/2012 dated 17th March 2012. This is not provided in the Act or the Rules. - Taxation by way of administrative instructions which are not backed by any authority of law is unreasonable and is contrary to article 265 of the Constitution of India. The court accordingly, strikes down Section 65 (105) (zzzzw) of the Finance Act 1994 pertaining to levy of service tax on the provision of short-term accommodation and the corresponding instructions/circulars seeking to operationalise the levy as unconstitutional and invalid. - Decided in favor of assessee and against the revenue.

Issues Involved:
1. Constitutional validity of Section 65 (105) (zzzzv) of the Finance Act 1994.
2. Constitutional validity of Section 65 (105) (zzzzw) of the Finance Act 1994.
3. Declaration regarding Section 66 E (i) of the Finance Act.
4. Validity of Rule 2C of the Service Tax (Determination of Value) Rules, 2006.

Issue-wise Detailed Analysis:

1. Constitutional Validity of Section 65 (105) (zzzzv) of the Finance Act 1994:
The petitioners challenged the constitutional validity of Section 65 (105) (zzzzv) of the Finance Act 1994, which levied service tax on services provided by air-conditioned restaurants with a license to serve liquor. They argued that after the Constitution (Forty-Sixth Amendment) Act, 1982, the provision of food and beverages in a restaurant was entirely covered by Entry 54 of List II, making it a state subject. They contended that no part of the transaction of supply of food in a restaurant or hotel could be made amenable to service tax by Parliament, thus rendering Section 65 (105) (zzzzv) beyond the legislative competence of Parliament.

The court examined the legislative history behind the 46th Amendment and noted that the amendment aimed to bring transactions resembling sales within the ambit of sales tax. The court concluded that the service portion of a composite catering contract could be segregated and made amenable to service tax. The court upheld the constitutional validity of Section 65 (105) (zzzzv) of the Finance Act, stating that Parliament had the legislative competence to enact provisions for levying service tax on the service component of the composite contract of supply of food and drinks by an air-conditioned restaurant.

2. Constitutional Validity of Section 65 (105) (zzzzw) of the Finance Act 1994:
The petitioners challenged Section 65 (105) (zzzzw) of the Finance Act 1994, which levied service tax on short-term accommodation provided by hotels, inns, guest houses, clubs, or camp-sites for a continuous period of less than three months. They argued that the levy of tax on luxuries, including accommodation, was entirely covered by Entry 62 of List II (State List), and therefore, Parliament lacked the legislative competence to levy such service tax.

The court examined the relevant provisions of the Delhi Tax Luxuries Act, 1996, which levied luxury tax on accommodation in hotels. The court found that the subject matter of the luxury tax under the state legislation and the service tax under the Finance Act was identical. The court concluded that the provision of short-term accommodation in hotels was entirely covered by the term 'luxuries' in Entry 62 of List II and was outside the legislative competence of Parliament. Consequently, the court struck down Section 65 (105) (zzzzw) of the Finance Act as unconstitutional and invalid.

3. Declaration Regarding Section 66 E (i) of the Finance Act:
The petitioners sought a declaration that Section 66 E (i) of the Finance Act, which constituted a service portion in an activity of supply of food or other articles as 'declared service,' was bad in law. The court upheld the constitutional validity of Section 66 E (i), stating that the legislative carving out of the service portion of the composite contract of supply of food and drinks had a sound constitutional basis. The court noted that the provision was legally permissible and that Parliament had the legislative competence to enact it.

4. Validity of Rule 2C of the Service Tax (Determination of Value) Rules, 2006:
The petitioners challenged Rule 2C of the Service Tax (Determination of Value) Rules, 2006, which attributed 40% of the value of the composite contract of supply of food and drinks to the service component. They argued that the rule was arbitrary and lacked a basis. The court upheld the validity of Rule 2C, stating that it provided a definite value to the service portion of the composite contract and correspondingly provided an abatement for the portion pertaining to the supply of goods. The court noted that the rule had the approval of the Supreme Court and satisfied the legal requisites for determining the value of taxable service.

Conclusion:
The court upheld the constitutional validity of Section 65 (105) (zzzzv) and Section 66 E (i) of the Finance Act, as well as Rule 2C of the Service Tax (Determination of Value) Rules, 2006. However, the court struck down Section 65 (105) (zzzzw) of the Finance Act pertaining to the levy of service tax on the provision of short-term accommodation as unconstitutional and invalid. The writ petition was disposed of in these terms, with no orders as to costs.

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